Gasoline Prices to Rise as Promise in Iraq Upended

Rising U.S. oil production, with weekly rates reaching a 28-year high in early June has reduced price volatility for crude and oil products such as gasoline and diesel, and held prices down.

The growing production countered global supply disruptions, namely from members of the Organization of the Petroleum Exporting Countries, and uncertainty amid the ongoing Ukraine crisis, acting as a bulwark of stability.

Iraq, a recent success story in the oil patch as it ramped up crude production to 3.1 million bpd, has however quickly devolved into chaos, pushing global crude prices higher. The quick rise of Sunni militants and their march through central and eastern Iraq, capturing cities at will, and push to the capitol of Baghdad in early June caught many by surprise, and has upended price expectations for gasoline in the U.S.

Gasoline futures trading on the New York Mercantile Exchange, called Reformulated Blendstock for Oxygenate Blending, spiked to a nearly two-month high at $3.1123 on June 13, halting in front of the prevailing high for 2014 of $3.1128 gallon. In six trading sessions, RBOB futures spiked 19.21cts or 6.6%.

Brent crude futures trading on the ICE platform surged to $114.69 bbl June 13, a nine-month high, with the Brent contract serving as an international price marker for crude. The U.S. benchmark, the West Texas Intermediate crude contract on NYMEX, also rallied to a nine-month high, reaching $107.68 bbl June 13. The crude contracts could easily climb another $3 to $5 bbl in short order amid further deterioration in Iraq.

Geopolitical tensions have underpinned higher crude prices for much of 2014, keeping WTI over $100 bbl. Lost production in Nigeria and Libya, two members along with Iraq that are part of OPEC, have embedded a higher premium in global oil prices despite rising production in non-OPEC countries, namely the U.S. Saudi Arabia has quietly taken up the slack, boosting its production to offset the declines by other OPEC members. Iraq, where expectations were for crude production to grow to 4.0 million bpd on improving infrastructure following years of war, was also keeping a lid on even higher crude prices.

The Islamic State of Iraq in the Levant are radicalized Sunnis that seek a state of their own that includes parts of Syria and Iraq. They have fought against the regime of Bashar al-Assad in Syria’s bloody civil war, and oppose Iraq’s Shiite-led government.

ISIS has already captured large chunks of Iraq’s oil infrastructure. Oil exports from northern Iraq are said to be disrupted, with the biggest prize in southern Iraq. Analysts are uncertain how much crude production would be lost amid the fighting, but the events are clearly a game changer for the oil market that can expect crude prices to remain high in the near term at the very least.

Ahead of the lightning strikes in Iraq by ISIS, the International Energy Agency had pushed OPEC to increase their production by 700,000 bpd in the second half of 2014 to counter higher global oil demand expectations and lost production from Libya and Nigeria. OPEC demurred, maintaining their 30 million bpd production quota at their June 11 meeting in Vienna, Austria.

As they always are, global events affecting oil prices are fluid. Accurately quantifying the long-lasting effect of the ISIS campaign in Iraq upon global oil prices is simply not possible at this time, but in the short-term, it spells higher crude costs.

The U.S. average retail price for all formulations of regular grade gasoline per the Energy Information Administration’s weekly survey fell 1.6cts to $3.674 gallon June 9, with the decline in line with the seasonal tendency for prices to dip following a run-up to Memorial Day. The historical pattern suggests the average should decline for another couple of weeks. However, Iraq trumps the seasonality feature, and gasoline prices will go higher. The question analysts now confront is how much higher and for how long will they stay elevated.

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